I’m trying to look it up, and I’m finding lots of resources regarding demand elasticity and consumer focused things, but I’m having a hard time grasping what elasticity of supply is, as well as it’s relationship to producer surplus. I know the definitions, I know the graphs, I can probably do some math problems, but I can not comprehend what it *means* in simple, real life terms. & like, is elastic or inelastic better? I know that with a higher elasticity, producer surplus is lower, but what does that even mean? Why?
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**Producer surplus:** I make pottery. It cost me $100 dollars in labor, clay, etc. to make 10 plates. In order to break even and make a little profit, I would need to sell a plate for $11. That’s the lowest price I’d accept.
I go to market, and others are selling their plates for $15. I think, “Sweet! I can sell my plates for more than $11!” The producer surplus is $4, as that’s the difference between what I would accept and what I can actually sell my plates for.
**Elasticity of Supply:** I make pottery. Vases, mugs, plates, you name it and I probably make it.
I go to the market and see that plates are selling for $50, while vases are going for $25. It costs me the same amount of money to make plates and vases. Seeing these prices, I start furiously making plates instead of vases. This is an elastic supply. The price of a product changes how much of it I make.
Now, imagine if I have a limited amount of clay. If the price of plates rises, I can make some more plates. However, I can’t make as many plates as I want to because I run out of clay. This reflects a lower elasticity, because I actually *can’t* adjust my production to prices as much as I would want to.
**How they’re related:** Let’s use the pottery example with limited clay again. If plates are at $50, it means a LOT of people need plates and there aren’t many around. If I can’t make enough plates to meet demand, the price isn’t going to change that much because there will still be a lack of plates. This means that I get a large producer surplus, because supply can’t as easily meet demand.
If I have unlimited clay, I can meet the change in demand. This means that the number of plates in the market will (most likely) be closer to matching the actual demand. When this happens, I have to sell my plates for closer to my lowest price because demand isn’t as high. I have a lower producer surplus as a result.
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